Alternative to Bank Financing

March 22, 2012

Funding your churches vision is always challenging, but with tighter restrictions on financing, the challenge has become bigger. While banks are still the most popular route, especially for those wanting short term loans, bond financing has emerged as another great alternative.

But don’t dismiss bond financing because of stories you’ve heard in the past. There are some very good companies offering long term fixed rate loans that can be a great option. To get the best information on the subject, I asked David Roberts, Senior Loan Officer for Rives, Leavell, and Co. to answer some common questions about bond financing.

In what situations can bonds be a good alternative to traditional bank loans?

If a church is looking for a long term fixed interest rate, a bond issue is often the only solution available. Commercial banks offer adjustable rate loans that typically balloon every three to five years. This is due to the cost of funds based on deposits with an average term of 90 days. Adjustable rate financing leaves a church at risk of rising interest rates and the need to re-qualify for a loan every three to five years.

Isn’t a bond loan more expensive than a bank loan?

Not necessarily. It depends on the borrowing timeline of the individual church. All commercial loans and bond issues have origination fees that are paid on the front end of the loan to the lender. Origination fees on a bond issue are higher to account for the need to market bonds and provide the funds to the church on a timely basis. Depending on the timeline of the borrower, these fees can be minimal compared to the increase in payments the church may face if interest rates increase at any one of 4 or 5 rate adjustment periods over the life of the loan.

Can you still pay off a loan early if its bond financing?

Absolutely, a bond issue has a prepayment enhancement that reduces the overall APR when the church accelerates principal payments. This is accomplished by prepaying the longer term bond coupons (which have higher interest rates) which then reduces the interest average over the life of the loan to the church.

In the past, church members have had to buy all the bonds, is this still the case?

Church members are still offered the opportunity, but there is no obligation to purchase bonds of their home church. However, Rives, Leavell & Co. (RLC) has a team of account executives that have retail clients who value the investment opportunities that church bonds provide. RLC can offer and sell bonds not subscribed by the church membership and friends to those retail clients of our firm.

Are there any additional features of a church bond issue that make it an attractive alternative?

A bond issue provides many terms and conditions designed to benefit the church. These include customized payments, amortization terms up to 30 years, and an open-ended deed of trust that permits future borrowing without refinancing existing debt. An RLC Loan Officer is willing to share these benefits without cost or obligation to your church.

My thanks to David for taking the time to answer these questions. While bond financing may not always be the best option for your church, it is an option worth investigating. Just as we would advise you to give your members all options possible to give the money God has blessed them with, we also would advise you to take the time to find the best option to use the finances the church has been blessed with.

As always feel free to contact us for more help as you seek to teach Christ-like generosity.